REVIEWS

A Tract on Monetary Reform. By J. M. KEYNES. (Macmillan & Co. 1923. 78. 6d.)

MR. KEYNES dedicates his book, "humbly and without permission, to the Governors and Court of the Bank of England, who now and for the future have a much more difficult and anxious task entrusted to them than in former days." Monetary Reform, in fact, is above all a responsibility attaching to the Central Banks of issue, of which the foremost in the world is the Bank of England. "In the modern world of paper currency and bank credit there is no escape from a managed' currency, whether we wish it or not;-convertibility into gold will not alter the fact that the value of gold itself depends on the policy of the Central Banks (p. 170).

Mr. Keynes's five chapters fall into three parts. The first two are devoted to an analysis of the disorders that have arisen in the realm of currency during and since the war. Chapter I gives a most illuminating account of the consequences to society of changes in the value of money. Chapter II deals with the subject in relation to public finance. Here Mr. Keynes brings out the effect of discredit of the currency in limiting the possibility of procuring resources for a Government by forced issues of paper money. The "flight" from the currency is the method of defence adopted by the public against the efforts of the Government to fleece them by inflation. Perhaps Mr. Keynes is a little too tolerant of the idea of using paper money in this way. It is doubtless impossible to deny that "a Government can live by this means when it can live by no other," while his whole argument is directed to prove that even by this means a Government cannot live indefinitely. And it may be that his solemn disquisition upon inflation as a method of taxation is intended to have a gently ironical flavour. Probably Mr. Keynes has felt bound to take this absurdity seriously because great statesmen and bankers in some parts of Europe have not merely taken it seriously, but have put it into practice and defended their action. The withering denunciation in the "Economic Consequences of the Peace" of the policy of debauching the

currency is more satisfying, even though Mr. Keynes's apparently detached criticism has the advantage at any rate of revealing the exact way in which this extravagant abuse must lead to a breakdown.

In his middle chapter Mr. Keynes deals with matters of general theory. He does not aim at giving even in outline a complete exposition of monetary theory (which would, of course, be out of place in such a book), but rather at filling in certain gaps where the theories commonly accepted are defective.

First of all he re-states the Quantity Theory, introducing, in place of the awkward concept of rapidity of circulation, the much more workable one of what may be described as the wealth value of people's balances of cash and credit; k and k' have already become famous among currency experts. Next follows a very acute criticism of the purchasing power parity theory of the foreign exchanges, particularly with reference to the equation of exchange " and to the relation between internal and external prices. The rest of the chapter is occupied with the two subjects of Seasonal Fluctuations, and the Forward Market in Exchanges, the latter being a topic upon which Mr. Keynes speaks with special authority.

Great as is the interest of these first three chapters, public attention has not unnaturally been mainly attracted to the remaining two, in which are set out Mr. Keynes's practical proposals.

In Chapter IV he propounds three questions:

(1) Do we wish to fix the standard of value near the existing value, or to restore it to the pre-war value?

(2) Should the currency be stable in terms of purchasing power or in terms of certain foreign currencies ?

(3) Should a gold standard be restored?

Armed with the results of the preceding chapters, Mr. Keynes decides in favour of stabilising the currency at or near its existing value, and stabilising it in terms of internal prices rather than of foreign currencies.

The gold standard he rejects, and it is this rejection that has aroused more controversy than anything else in the book. He thinks that before the war gold provided a reasonably stable standard of value. "But the war has effected a great change. Gold itself has become a managed currency." Gold "stands at an artificial value, the future course of which almost entirely depends on the policy of the Federal Reserve Board of the United States." The reinstatement of the gold standard means,

therefore," that we surrender the regulation of our price level and the handling of the credit cycle to the Federal Reserve Board." For the present the Federal Reserve Board is pursuing the policy of a stabilised dollar, "the latest scientific improvements, devised in the economic laboratory of Harvard." It may continue in this path, but even so the adoption of a gold standard by this country would have the disadvantage of placing our currency at the mercy of the Board, for in Mr. Keynes's opinion the Board would enjoy a preponderance of power over the Bank of England. But there is no guarantee that America will adhere to a stabilised gold dollar. The Federal Reserve Board "is still liable to be overwhelmed by the impetuosity of a cheap money campaign," with the inevitable consequences of a wild rise in dollar prices such as occurred in 1919-20. And there is further "the possibility of a partial demonetisation of gold by the United States through a closing of its mints to further receipts of gold." Gold would then be left to depreciate without the support of the American monetary demand.

Mr. Keynes's chief fear is a change of policy in America, bringing about a sudden and inordinate fall in the commodity value of gold. Undeniably this might occur. If it did, it is difficult to challenge the conclusion that, temporarily at any rate, it might be advisable to suspend the free coinage of gold rather than compel the Bank of England to buy all that America might export.

At the same time it is not desirable to exaggerate this danger. Suppose the "cheap money campaign" to materialise, and an expansion of credit on the grand scale to begin. And suppose that the Bank of England and the central banks of other countries which are close to gold parity decide to do what they can to check an excessive credit expansion. Gold will flow from America first to Sweden, then to Canada, then to Holland, then to Switzerland. The drain of gold into these countries would have to be enough to swamp the control of credit in them one by one. It would make but a slight impression upon the American supply of over £800 millions, but it would not be negligible. An export of gold, even if it be no more than £20 or £30 millions, is likely to have a perceptible psychological effect. Once the loss of gold begins, people ask when it is going to stop, and whether something ought not to be done to check it.

By the time the commodity value of the dollar has fallen to that of sterling, the turn of London to attract gold will have

come. If the Bank of England and the Treasury co-operate to prevent the gold from occasioning a credit expansion (e. g. if bank rate is kept up and sufficient Treasury bills are sold to draw off the redundant gold into the Currency Notes Reserve Account), London could absorb enough gold to affect the American situation seriously. It is not merely that the withdrawal of £100 or £150 millions of gold would necessitate a corresponding increase in rediscounts. If the Federal Reserve Banks were pursuing a deliberately inflationary policy, they would not take advantage of that to restrain the credit expansion. But the restoration of the gold standard in England and elsewhere would mean that the world prices of American exports would be kept down. The gold exports would, in fact, take the place of the goods which rising internal prices prevented American producers from selling abroad. Now in the American credit system the exporting interests happen to play a very prominent part, and as the demand for their products in the home market is on the whole very inelastic, an unfavourable export market is apt to react sharply upon the state of credit. Thus so long as a credit expansion is successfully prevented in European gold standard countries, the American credit expansion is likely to be kept within bounds. That expectation of rising prices and ready sales upon which a credit expansion feeds itself would be absent from the most important part of the American credit market.

These circumstances are not an absolute safeguard against an American inflationary movement flooding us with gold. Nor can it be taken for granted that the Central Banks of Europe will take the right action to prevent a credit expansion spreading from the United States to their countries. A high bank rate and a credit restriction in face of excessive imports of gold would be in flagrant contravention of all the rules so dear to the thumbs of the City.

But merely to discuss the question whether the gold standard should or should not be restored is to take for granted an advance upon pre-war ideas on the subject of credit control. This once admitted, the course suggested becomes a reasonable alternative to a suspension of the free coinage of gold. It would, however, be open to the objection that it would place upon us "our share of the vain expense of bottling up the world's redundant gold " (p. 175). For the moment indeed our share would be heavy, but it is not at all certain that we could not quickly diminish it. Some of the gold would probably return across the Atlantic when a cold fit supervened there. Some would be absorbed by

countries in Europe and South America reverting one by one to a gold standard.

When Mr. Keynes turns round to view the problem of the redundant gold from the American standpoint, and argues in favour of the suspension of free coinage of gold in the United States, in order to get rid of it, he contends that the depreciation of the dollar "would need to be prolonged and determined to produce the required result. Dollar prices would have to rise very high before America's impoverished customers, starving for real goods and having no use for barren metal, would relieve her of £200,000,000 worth of gold in preference to taking commodities" (p. 201). Is not this a misconception of the alternatives as they would present themselves to the responsible authorities in Europe? The British Government would have to consider, not whether to receive gold or goods, but whether to forgo part of the profits of issue, as the price of restraining an undue expansion of credit, or whether to demonetise gold. The effect of the former course would be (really, but not apparently) to delay debt redemption, and probably to diminish the amount of capital this country could invest abroad. The situation would be much the same in Holland and Switzerland. And even in countries which do not invest abroad it is not at all likely that the Governments and Central Banks would be unwilling to receive gold at the cost of forgoing a part of their imports. Whatever economists think, Governments are in practice much less reluctant to discourage imports than exports.

Thus a violent depreciation of the commodity value of gold arising out of a relapse of the United States into inflation, though not an impossible, is still not a very probable contingency. If there are real advantages in the re-establishment and maintenance of an international gold standard, it would be foolish to abandon these advantages as a mere precaution against a remote danger.

There remains the possibility that the United States may demonetise gold. Mr. Keynes recommends both the United States and Great Britain to take this step, and threatens each with the consequences of the other taking it. If either country abandons gold, the advantages to the other of retaining it are obviously diminished, while the difficulty of keeping up the commodity value of a gold currency unit is enormously increased.

Mr. Keynes hardly does justice to the case for retaining the gold standard. He greatly under-estimates the importance of the vested interests affected. Besides the interests of the gold